Deliveries across over 30 Middle East and Africa markets with four regional manufacturing sites
Challenge
The client’s procurement team, consisting of five executives and one manager, handled distinct categories: tobacco cut rag, acetate tow, packaging materials, and indirect purchases. Procurement relied heavily on established vendors, with periodic renegotiations upon approval of new vendors. While switching costs and potential quality issues made changes in tobacco suppliers strategically challenging, packaging materials had a broad vendor base and low switching costs, presenting an opportunity for improvement.
Solution
A comprehensive procurement process analysis highlighted potential cost optimization, particularly in packaging materials. We introduced a structured tender process, including detailed documentation specifying material requirements, annual volumes, and price indexation linked to crucial raw materials like paper and wood pulp. This approach enabled precise evaluation and comparison of supplier offers.
Critical steps in the procurement transformation included:
- Competitive Tendering: The tender process involved multiple rounds of negotiation, gradually reducing the number of participating suppliers. Contracts were awarded to primary suppliers (75% of volume) and secondary, supportive suppliers (25% of volume).
- Expansion of Supplier Base: Beyond optimizing packaging procurement, the strategy extended to other spend categories such as acetate tow and wrap films. Expanding sourcing options from Europe to include China further diversified supply channels.
Outcome
This procurement transformation yielded significant benefits, including:
- A 7% reduction in direct material costs through the tender process for packaging materials and acetate tow.
- An additional 2% annual savings by expanding the supplier base to include competitive offerings from China.
